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6.2. Recursive Cointegration Test Results

6.2.1. G7 countries

Results of Gregory-Hansen test indicate that the system of the world’s largest markets has
fluctuated around a common trend in the long run. To explore the dynamics of the equilibrium
relationship in further detail, we turn to the multivariate recursive cointegration methodology by
Hansen and Johansen (1999). Figures 2 present values of the recursive trace statistics for the null
hypothesis of no cointegration (
r=0) for the group of G7 markets.

[Figure 2 about here]

The results are presented for the whole sample period. Figure 2 suggests that there is
instability in the group dynamics, reflected in large variations of the trace statistics. It appears
that roughly four distinct periods could be separated out, indicated by shading on the graph. The
first period ranges from March 1996 till September 1997. It is considered an unstable period with
the minimum number of cointegration relations fluctuating between 1 and 4. In the second period
ranging form October 1997 till September 2000, we notice stabilized convergence. The second
period in turn may be further divided into two sub periods, before and after September 1998.
These sub periods “separates out” the time of the Asian and Russian financial crises, suggesting
that crisis events had repercussions not only for the emerging financial markets, but also
influenced the dynamics of the interrelationships between the world’s largest financial markets.
The number of cointegration relations between 1997 and 1999 is 2 or 3; but the convergence
processes slow down between 1999 and 2000 with minimum number of cointegration vectors
being 2 and 1. It is noteworthy that during the period of 1996-1998 there were several common
trends in the sample and this was the period analyzed in Olienyk, Zumwalt and Schwebach

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